Poloz’s Rate Decision to Reflect Canada’s ‘Unfolding’ Recoveryby
Central Bank expected to keep benchmark lending rate at 0.5%
Rebound in GDP and exports signals recovery in second half
Bank of Canada Governor Stephen Poloz, who releases his latest interest rate decision Wednesday, will highlight recent good news on the economy as evidence his recovery narrative is unfolding as it should.
Poloz’s decision at 10 a.m. in Ottawa will probably affirm the bank’s 0.5 percent benchmark lending rate and update his view of a second-half rebound, after tepid exports and Alberta wildfires led the economy to contract by the most since 2009 in the second quarter.
Here are the main things to watch for in the central bank’s statement:
Two key reports last week provided a break in the months-long gloom: Merchandise exports surged 3.4 percent in July and gross domestic product rose faster in June than economists predicted. The data is enough for Poloz to stick to his view of a rotation toward growth led by exports and business investment, after years of what he calls “serial disappointment” in global demand.
“They will continue to say they expect this rotation to play out,” even in a time of “pretty significant swings in growth,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said by phone from Toronto.
Long Way to Go
Given the economy shrank at a 1.6 percent annualized pace in the second quarter, it’s still too early to pronounce the country is in full-fledged recovery mode. Canadian Imperial Bank of Commerce doesn’t see Poloz raising rates until the second quarter of 2018. That’s even as the U.S. Federal Reserve looks set to increase rates in 2016.
“Look for Poloz’s team to be no better than cautiously optimistic,” Avery Shenfeld, Toronto-based chief economist at CIBC, wrote in a research note. “We’ve got a long way to go to demonstrate that the economy has sufficient vigor.”
Poloz has long said that other policy makers must take the lead in curbing imbalances from a housing boom in Vancouver that has taken average prices well past a million dollars, and the British Columbia government last month set a 15 percent tax on foreign home buyers. Vancouver sales subsequently fell 26 percent in August from a year earlier. Look for Poloz to reiterate concern about “financial vulnerabilities” in Toronto and Vancouver, as he did in the July statement.
*Poloz has said a recovery in the U.S., consumer of three quarters of Canadian exports, will be key for a rebound north of the border, a theme he may touch on again Wednesday.
The U.S. economy is strengthening, and that will “help pull up the overall global demand,” Sean McGuckin, Bank of Nova Scotia Chief Financial Officer, said in an Aug. 30 phone interview. “That’ll be good for our economy as well.”
*Poloz can probably move away from discussing setbacks such as the oil shock and the Alberta wildfires, which should free him to focus more on economic data as a guideline for any rate moves. Robert Kavcic, a Bank of Montreal senior economist in Toronto, expects
“a very neutral bottom line in that statement that allows them to sit on the sidelines for a very long time.”
The mix of economic data gives Poloz more flexibility to strike the tone he wishes in the statement, with little need to signal any shift in his stance from the neutral message given in July, said Craig Alexander, chief economist at the Conference Board of Canada in Ottawa.
“The narrative they were delivering is unfolding,” he said.